The Mutual Fund Show: What's The Right Number Of Funds In A Portfolio?

How many mutual funds are too many? What makes an optimal portfolio? These are questions that investors rack their brains about. Diversification ensures you get the best returns, or so goes common advice.

Rohin Pagdiwala, CFP and founder of Pagdiwala Investments, said a portfolio can achieve sufficient diversification with 7-10 funds. Asset allocation should determine the selection of funds, he said.

"Ensure to choose 2-3 funds within a single category. Excessive diversification results in returns that closely mirror index returns," he told NDTV Profit. "Over-diversification is equal to returns closer to index returns."

According to Kartik Shah, founder of MMY Investments, having a mix of 6-8 funds in the equity segment can provide diversified exposure to various stocks. "This mix may include a passive fund focusing on large-cap stocks, one or two funds in the flexi-cap category with different investment styles, as well as one fund each in the small-cap and mid-cap segments, along with an international fund," he said.

Shah lists two common mistakes made by investors that leads to a cluttered portfolio over time:

• Subscribing to a new fund offer without careful consideration.

• Adding top-rated funds every year to your portfolio.

"Too many funds lead to operational headache," Pagdiwala warned.

Top Fund Picks

Shah's top picks include:

• Parag Parekh Flexi Cap Fund and Canara Robecco Flexi Cap among flexi-cap funds.

• Kotak Emerging Equity Fund and Nippon India Growth Fund among mid-cap funds.

• Nifty 50 Index fund among index funds.

Pagdiwala's top picks comprise:

• Flexi-cap funds: HDFC Flexi Cap, JM Flexi Fund.

• Multi-cap funds: Quant Active, Kotak Multicap Fund.

Before you begin decluttering your portfolio, Shah suggested reviewing the performance of the funds in comparison with the benchmark. Additionally, consider the tax implications of the fund, he said.

If you're revamping your portfolio and have too many funds, make sure to consult an advisor and keep in mind the taxation impact of exiting old funds, Pagdiwala said.